Compute the price elasticity of demand
Question 1:
Demand for a product produced by a firm is given by the expression: P = 60 ? 5Q. Fixed cost is 20. Variable costs of producing Q units are VC (Q) = ? Q2 + 16Q.
(I) Find expressions for total, average and marginal costs. Find expressions for total, average and marginal revenue. Find an expression for profit.
(II) Find an output that maximizes the total revenue. Compute the price elasticity of demand at this output. Explain the economic reasons for the value of the price elasticity of demand found at this level of output. How big is the maximum possible total revenue?
(III) Find an output that maximizes the profit. Compute the elasticity of demand at this output. Check if the demand is elastic or inelastic at this output and explain the economic intuition for the answer found. How big is the maximum possible profit?